Documentation saves the day for taxpayer

A recent Tax Court case serves as a reminder of the importance of contemporaneous documentation.

Over a period of years, Thomas Kaider provided a number of services to his uncle, Edward Quinn. Some of these services related to Quinn's businesses, and some were of a personal nature.

Among the payments Kaider received from Quinn were 10 checks totaling $58,500. These checks were written between July 2005 and April 2006 and were treated by both parties as loans. In 2007, one of Quinn's companies filed a Form 1099-MISC with the IRS, showing the $58,500 as non-employee compensation paid to Kaider.

The IRS asserted that Kaider had unreported income, based on the Form 1099-MISC. Kaider appealed to the Tax Court, who examined the intricacies of the entire transaction.

The court determined that each of the checks reflected a bona fide loan because:

  • There was a reasonable expectation that Kaider would be able to repay the amount of the checks received.
  • The loan agreements that were executed for each check showed an intent to create a debtor-creditor relationship.
  • Provisions were included in the loan agreements for a fixed repayment date and an annual interest rate.
  • There was a notation on each check indicating it was a loan.
  • The checks were drawn on Quinn's individual checking account, not his business account.
  • The amount of the checks was not deducted as compensation paid by Quinn's business.
  • There was no evidence that the loans were disguised as compensation for Kaider's services.
  • The court record does not reveal who caused the filing of the Form 1099-MISC. (Thomas J. Kaider v. Commissioner, TC Memo 2011-174, July 29, 2011)
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